Commercial construction and real estate are not directly linked to the residential market except for a relatively small portion of the total (10% would be a reasonable estimate). The linkage has more to do with the how both tie into the business cycle and the longer lead times in the commercial environment.
This does leave open the possibility of a de-coupling. One of the better arguments is that off-shore demand will keep the commercial markets going. Unfortunately the dollar weakness that helps this offshore demand also has a tendency to hurt the commercial area. You see it know where even with the falloff in residential construction, the cost of construction products is not falling but continuing to climb.
What about TIAA? I'm sure they don't hold any commercial real estate paper...NOT!
Every time I feel my [rhymes with heinous] dilate uncomfortably, I look over my shoulder in the mirror only to see the smiling, grandfatherly face of Alan Greenspan gazing into my eyes. He seems to be enjoying himself.
AZ_Cowboy, the weakness in nonresidential investment is very concerning - and I might have to rethink my coin-flip view. Luckily the drag from RI should lessen a little going forward (housing will continue to slump, but the impact on GDP will be less).
If CRE does slump, the delinquency rates will really start to rise - and that could lead to a much larger credit crunch. The Q1 delinquency rates on CRE should be out in the next couple of weeks - and that might change my overall view.
Russell, there is a possibility for a "decoupling". I noted this a few weeks ago when I wrote:
"It is possible that the big investment slump in the early '00s has left many markets with too little supply of commercial and office buildings (and other non-residential structures). ... Therefore it is possible that investment in non-residential structures will decouple (at least somewhat, and for a short period) from the typical pattern."
To your first point, unfortunately a portion of CRE is directly linked to residential - think shopping centers, restaurants, gas stations, etc. - all being built in new residential communities. The WaPo mentioned this last year:
Builders of non-residential projects say they are simply playing catch-up. So many new neighborhoods filled up during the housing boom that they're still building the stores, offices, restaurants, bank branches, hotels and hospitals needed to serve the influx of residents.
"housing will continue to slump, but the impact on GDP will be less"
Sometime when you're in the mood, could you explain that one? To me, it isn't the slope of the curve, it is the magnitude... just like when the Fed raises or lowers rates... just like when you rest your foot on the brake pedal and drag the brakes.
CR, very nice graph of non-residential investment vs. loan demand. Between that graph and your long running one on residential and lagged non-residential, I'm convinced that we'll see a drop, and soon.
"While it may also result in accounting charges on quarterly earnings reports of public companies with mortgage lending units later this year, it could limit the economic fallout from the overaggressive mortgage practices of the past few years."
So basically, they'll be admitting to being overaggressive in their mortgage practices.
Regulators telling them to stop playing games in the Q reports. show things as they are and based on the true situation reduce making risky loans.
CFC will be badly hit by this on the report and in reducing biz.
It should save CFC in the long run but will drive share price lower in the short term
wally, I was talking about the direct impact on GDP from housing, not any spillover effects (like less consumption). It's just a numbers game ... over the last 4 quarters, RI has contributed -0.72, -1.20, -1.21, and -0.97 to the percent change in real GDP. See this table. This drag will diminish going forward, but RI will continue to decline.
CR, what is the mechanism that results in commercial real estate following residential real estate with a lag? Does a slump in residential real estate somehow cause commercial building to slow down?
Or is a third factor causing both residential and commercial real estate to slow down but residential real estate with shorter lag times fall first? Possibly credit conditions tightening could cause both types of projects to slow down.
I can see how some non-residential projects such as stores, offices, restaurants, bank branches, hotels and hospitals slow down when residential projects in neighborhoods they serve slow down.
But do other commercial projects slow down because of a fall in consumer spending?
Gavin, some commercial is unrelated to housing, other projects (like the ones you mentioned) are typically built after the residential is sold.
From the WaPo: "People have got to get groceries. They've got to get their hair cut. They need to go to the cleaners." ... The companies that provide those services "don't build until they see the rooftops" over new customers ...
So this type of commercial usually comes after the residential is built.
There are probably other reasons too - like the slowdown in consumer spending leading to fewer store expansions.
Non-residential investment doesn't go to zero (and typically the "cliff" isn't as steep compared to residential). Unfortunately for lenders, CRE project developers default on their loans much sooner than residential - so delinquency rates can really sky for CRE projects.
"I was talking about the direct impact on GDP from housing, not any spillover effects (like less consumption). "
But why do you say that? There seems to me to be an unavoidable circular pattern here of less consumption and less activity and so less consumption and less activity. In 2001 it was decided that the solution to restart the economy was low rates and slack lending practices.....ok so we go again to low rates....but credit has tightened for many years anyway.
What stops the dominos continually tripping towards disaster?
But with 1/2 the country heck bound on curtailing immigration of any kind and the job market sending them home voluntarily, all of a sudden you no longer have a sucker to pay for J6P's pension cash out(unless China & India get fully vested) or J6P buys more shares in the hope that the musical chairs don't stop before China & India get fully vested.
I understand this bull argument and it holds a coffee cup full of water. The problem is that India is running out of educated people and China is running out of cheap labor that's close to a port.
These are problems that aren't easily(or quickly) solved and not within a timeframe that corresponds with our demographic shift.
Perhaps if all parties involved had pushed the transition back 5 years or so...
In regard to your coin-flip forecast, I hate to say I told you so, but, in my opinion, chances of two negative quarters of GDP have increased substantially and now exceed 70%.
There is a growing concern in the HY markets among money managers concerning the spreads, some of the concern has turned decidedly negative in recent days. Spreads at historical lows are clearly unsustainable and potential losses in a market which could be charaterized as being illiquid in the face of participants rushing to unload positions at the same time could prove troublesome. If spreads widen as expected, the refinancing of the creative debt of recent times would be quite challenging.
I am hearing more stories of businesses balancing on the verge of shutting down on the retail front. Traffic is anemic and the consumer is showing increased signs of stress.
Inventories on the auto front are building dramtically, especially for GM and Ford, new incentives are bring rolled out to move trucks in particular, this will be met with little demand in my opinion and conditions will worsen.
I have made it a point to visit various auction/foreclosure properties over the last week and have seen amazing inventory, evidence of fraud, and banks which are not realistic due to exposure on the loans given.....yet.
I made it a point to read the fed reserve notes in archive from 9-11, what struck me was their reliance on the consumer sentiment surveys and consistent reference to confidence. I think that in the cominq quarters we will see a dramtic dive in confidence, the psychology of the markets will likely turn decidedly negative.
The decoupling that has been present between the capital markets and the real economy will evaporate in what could be a grand fashion.
I expect, a decisive move in the near-term and a return to the reality of what currently faces the economy. The continued deterioration in the quality of reported earnings was evident over the last quarter, if one bothered to look. A sharp deceleration is at hand, the inventory builds will prove to be ridiculously optimistic in the face of what is clearly a deteriorating consumer market.
Very difficult period ahead and the coin-flip needs to be revised.
Thanks to everyone that posts links -- reason alone to visit the comments sections.
One thing to consider is the amount of CRE investment that goes into big box stores. It seems to me that companies like Lowes and Best Buy build out stores based on the past five years of sales growth, which one can argue was MEW-driven and way above trend. Its likely that big boxes will be suffering from overcapacity for years to come.
Also, someone asked about CRE exposed banks. CRE-heavy regional and community banks in CA and the SW might have the most correlation with residential. This is because commercial lending in those regions is most likely to have "followed" new housing developments. Picture stripmalls and mortgage broker offices next to empty or unfinished housing developments...
Unlike residential, commercial real estate is not valued on a price per square foot basis - it is valued based on the income the property produces and the required rate of return (capitalization rate). Because of this, the only metric to deturmine if CRE is in a bubble is the the capitalization (cap) rate properties are trading at. It may also be possible to look at spread changes on CRE bonds as these indicate a price prediction going forward (though they may also only be reflecting volatility ex: if one property in the bond goes up 30% in value and another property goes down only 10% in value, the bond value will likely drop).
We can not look at the explosive 2004-2006 returns by REITS and conclude CRE is in a bubble. The increases in property value were, in many cases, justified. Many REITS during 2002/2003 bought distressed office properties after the .com boom which are now doing well (many markets out west have seen office rent rates increase 20% or 30% on a per square foot basis and have seen vacancy rates go for 20+% to around 10%).
There are only 2 data sources that I know of which have historical cap rates. One is the Real estate Research Corporation (RERC) and the other is Real Capital Analytics (who sell their data under several other names such as National Real Estate Index).
New York City Office has been the furthest ahead of the curve in cap rate declines (price increases). NYC has seen cap rates decline from roughly 8% to 5% over the last 3 years (with some properties trading as low as 4.5% or 4.25%).
Buying a high risk piece of real estate for a return below that of US Treasuries means one thing: Speculation. This is a market that is frothy, the rest of the country I'm not as sure on.
Hey everybody,
I will be on CNBC today talking about the starts and permits data as well as the broader housing issues at 12 noon and 4 pm NY time today (wed 5/16)(11 AM and 3 PM Chicago time). Tune in if you get the chance.
Steve Fontain: That was interesting information about the commercial property cap rate especially the steep decline in New York City from 8% to as low as 4.5% or 4.25%.
By the way if you valued residential properties using cap rate in Palo Alto, CA you will find duplexes with as low a cap rate as 0.48%.
Buy for $1,100,000 or rent for about $2000 per month.
CR - Interesting graph on the historical correlation between residential and non-residential. I'm struggling with what would fundamentally bring down non-res investment spending.
Mechanically, RI is about 4.5% of GDP and non-RI is about 12%, so it's much more important to the overall economy. The 12% weighting of non-residential investment spending consists of structures and equip. and software. The structures component is about 21% of the non-RI and the equip. and software is about 79%. (NOTE: I'm just pulling these numbers from Table 1.1.6 and 1.1.2 from the BEA) That would argue that businesses investing in equip. and software is the real driver. Given that profit margins have been rock solid, stock prices are up, and labor costs are relatively contained, why wouldn't businesses continue to invest and actually increase (particularly with exceptionally low inventories right now)?
Seems to me the seeds are sown for an increase in non-res. inv. spending going forward. So, while res. inv. may be a drag, non-res. looks poised to do well.
Accounting and taxation nuances a side, most of the properties are returning less than interest the loan is accumulating. Not a very desirable position to be in...
CR,
I had a question on the second graph. In the last few years residential investment hasn't been nearly as strong as it has in the past. This seems to some what contradict that we over invested in the last few years (at least relative to previous expansions). When this is compared to charts that show rapid increase in the price of houses as well as an over building. Were previous booms bigger or does this graph understate the current market inequalities?
The thing about looking at borrowing to finance non-residential construction is that it gets around fundamentals and looks right at the process of financing construction. As we have seen with business investment in equipment and software, the fundamentals can do a poor job of forecasting. By looking at demand for loans, we have a second forecasting model that serves as a check on the first. The fundamentals for non-residential construction may be quite sound, but borrowing behavior suggests a lack of interest. Coming up with a story that makes sense of both results would be nice, but the absence of such a story doesn't make the downturn in demand for loans any less scary.
By the way, since the housing problem started, three sectors have been suggested as potential offsets, primed to take up the slack and keep growth on an even keel. Business investment has not turned negative, but it has not been all that great - equipment and software spending has fallen in 2 of the past 4 quarters. Non-residential construction spending has made very small contributions to GDP growth (less than 0.1%) in each of the past 2 quarters, more or less in line with the slowing in demand represented in the lending officer data a year earlier. (Scary how that works.) Consumer spending is the only one of the "saviors" to carry much of a load, and surveys of economists show a central expectation that consumer spending every quarter this year will be lower than the average of the 6 prior quarters. Economists can be wrong, of course, but it isn't a pretty picture.
Yal: Monetary policy has only limited capacity to deal preemptively with financial bubbles, New York Federal Reserve Bank President Timothy Geithner said on Tuesday.
...
In his speech, Geithner outlined potential risks of a financial shock stemming from a higher concentration of exposure by big banks, higher leverage and slackness in risk management due to a long period of low volatility.
Nope, it wasn't our free-money policies. Nope. Not us. No way. Nope.
Not to be rude, but your statement is pretty much in agreement with what I said. Commercial real estate spending does not come from residential real estate directly, but is driven by many of the same economic factors. It just takes longer to get the commercial stuff up and running. However, it there are unique aspects to the current residential market that are internal to the market itself (like a speculative bubble) it is possible that commercial real estate will not follow in the normal pattern.
CR: The items that are seen as directly relating to residential construction are highly visible, but a relatively small percentage. To take a snap shot number, last July Residential, Office, Commercial and Amusement-Recreation only made up 14% of the total construction at $20.97MM. Education at $39.12MM or Highway and Street at $39.37 are both greater by themselves.
The Education-Highway numbers will often run almost counter-cyclical to the economy at times because they are often driven by tax revenues and that have to add in the additional long lead time for big public construction projects. A good example would have been Greenville County, South Carolina Public Schools. In the last recession they were laying off teachers while they were building more schools. It was simply a factor of the long lead time on their bond money and planning versus the immediate cash flow issues of paying teachers.
Commercial construction and real estate are not directly linked to the residential market except for a relatively small portion of the total (10% would be a reasonable estimate). The linkage has more to do with the how both tie into the business cycle and the longer lead times in the commercial environment.
This does leave open the possibility of a de-coupling. One of the better arguments is that off-shore demand will keep the commercial markets going. Unfortunately the dollar weakness that helps this offshore demand also has a tendency to hurt the commercial area. You see it know where even with the falloff in residential construction, the cost of construction products is not falling but continuing to climb.
Personal opinion: the link is strong and a drop is certain.
So which banks are most exposed to a downturn in CRE?
Off-shore demand? Not to be rude, but please step away from the bong. You've had enough.
The common linkage is the credit cycle. Cheap money leads to malinvestment and overcapacity. Nuff said.
CR- you still think the odds of a recession are a coin flip? That's a pretty steep cliff.
Banks, shmanks.
What about TIAA? I'm sure they don't hold any commercial real estate paper...NOT!
Every time I feel my [rhymes with heinous] dilate uncomfortably, I look over my shoulder in the mirror only to see the smiling, grandfatherly face of Alan Greenspan gazing into my eyes. He seems to be enjoying himself.
AZ_Cowboy, the weakness in nonresidential investment is very concerning - and I might have to rethink my coin-flip view. Luckily the drag from RI should lessen a little going forward (housing will continue to slump, but the impact on GDP will be less).
If CRE does slump, the delinquency rates will really start to rise - and that could lead to a much larger credit crunch. The Q1 delinquency rates on CRE should be out in the next couple of weeks - and that might change my overall view.
Best Wishes.
It is worth noting that credit default swaps for securities backed by commercial mortgages
increased spread significantly since January. The tightening is not so severe as for subprime but it is significant. This is why banks stated tightening commercial lending.
Russell, there is a possibility for a "decoupling". I noted this a few weeks ago when I wrote:
"It is possible that the big investment slump in the early '00s has left many markets with too little supply of commercial and office buildings (and other non-residential structures). ... Therefore it is possible that investment in non-residential structures will decouple (at least somewhat, and for a short period) from the typical pattern."
To your first point, unfortunately a portion of CRE is directly linked to residential - think shopping centers, restaurants, gas stations, etc. - all being built in new residential communities. The WaPo mentioned this last year:
Builders of non-residential projects say they are simply playing catch-up. So many new neighborhoods filled up during the housing boom that they're still building the stores, offices, restaurants, bank branches, hotels and hospitals needed to serve the influx of residents.
That "catch-up" is almost over.
Best Wishes.
"housing will continue to slump, but the impact on GDP will be less"
Sometime when you're in the mood, could you explain that one? To me, it isn't the slope of the curve, it is the magnitude... just like when the Fed raises or lowers rates... just like when you rest your foot on the brake pedal and drag the brakes.
CR, very nice graph of non-residential investment vs. loan demand. Between that graph and your long running one on residential and lagged non-residential, I'm convinced that we'll see a drop, and soon.
Keep up the good work, sir!
Slightly off topic, but still very interesting. It looks like Spain's property market is collapsing and the country is on the edge of an abyss.....
Spain risks crisis over vanishing reserves - Telegraph
"While it may also result in accounting charges on quarterly earnings reports of public companies with mortgage lending units later this year, it could limit the economic fallout from the overaggressive mortgage practices of the past few years."
Expired
So basically, they'll be admitting to being overaggressive in their mortgage practices.
Regulators telling them to stop playing games in the Q reports. show things as they are and based on the true situation reduce making risky loans.
CFC will be badly hit by this on the report and in reducing biz.
It should save CFC in the long run but will drive share price lower in the short term
I'm with Wally -- the impact on GDP hasn't even gotten underway.
What happens when job losses, slower retail sales, declining tax revenues, etc. all kick into higher gear? The "vicious cycle" is just starting.
wally, I was talking about the direct impact on GDP from housing, not any spillover effects (like less consumption). It's just a numbers game ... over the last 4 quarters, RI has contributed -0.72, -1.20, -1.21, and -0.97 to the percent change in real GDP. See this table. This drag will diminish going forward, but RI will continue to decline.
Best Wishes.
CR, what is the mechanism that results in commercial real estate following residential real estate with a lag? Does a slump in residential real estate somehow cause commercial building to slow down?
Or is a third factor causing both residential and commercial real estate to slow down but residential real estate with shorter lag times fall first? Possibly credit conditions tightening could cause both types of projects to slow down.
I can see how some non-residential projects such as stores, offices, restaurants, bank branches, hotels and hospitals slow down when residential projects in neighborhoods they serve slow down.
But do other commercial projects slow down because of a fall in consumer spending?
Gavin, some commercial is unrelated to housing, other projects (like the ones you mentioned) are typically built after the residential is sold.
From the WaPo: "People have got to get groceries. They've got to get their hair cut. They need to go to the cleaners." ... The companies that provide those services "don't build until they see the rooftops" over new customers ...
So this type of commercial usually comes after the residential is built.
There are probably other reasons too - like the slowdown in consumer spending leading to fewer store expansions.
Non-residential investment doesn't go to zero (and typically the "cliff" isn't as steep compared to residential). Unfortunately for lenders, CRE project developers default on their loans much sooner than residential - so delinquency rates can really sky for CRE projects.
Best Wishes.
CR, Great Blog from you and Tanta
"I was talking about the direct impact on GDP from housing, not any spillover effects (like less consumption). "
But why do you say that? There seems to me to be an unavoidable circular pattern here of less consumption and less activity and so less consumption and less activity. In 2001 it was decided that the solution to restart the economy was low rates and slack lending practices.....ok so we go again to low rates....but credit has tightened for many years anyway.
What stops the dominos continually tripping towards disaster?
A change in demographics, for starters.
But with 1/2 the country heck bound on curtailing immigration of any kind and the job market sending them home voluntarily, all of a sudden you no longer have a sucker to pay for J6P's pension cash out(unless China & India get fully vested) or J6P buys more shares in the hope that the musical chairs don't stop before China & India get fully vested.
I understand this bull argument and it holds a coffee cup full of water. The problem is that India is running out of educated people and China is running out of cheap labor that's close to a port.
These are problems that aren't easily(or quickly) solved and not within a timeframe that corresponds with our demographic shift.
Perhaps if all parties involved had pushed the transition back 5 years or so...
CR, good information on CRE lending.
In regard to your coin-flip forecast, I hate to say I told you so, but, in my opinion, chances of two negative quarters of GDP have increased substantially and now exceed 70%.
There is a growing concern in the HY markets among money managers concerning the spreads, some of the concern has turned decidedly negative in recent days. Spreads at historical lows are clearly unsustainable and potential losses in a market which could be charaterized as being illiquid in the face of participants rushing to unload positions at the same time could prove troublesome. If spreads widen as expected, the refinancing of the creative debt of recent times would be quite challenging.
I am hearing more stories of businesses balancing on the verge of shutting down on the retail front. Traffic is anemic and the consumer is showing increased signs of stress.
Inventories on the auto front are building dramtically, especially for GM and Ford, new incentives are bring rolled out to move trucks in particular, this will be met with little demand in my opinion and conditions will worsen.
I have made it a point to visit various auction/foreclosure properties over the last week and have seen amazing inventory, evidence of fraud, and banks which are not realistic due to exposure on the loans given.....yet.
I made it a point to read the fed reserve notes in archive from 9-11, what struck me was their reliance on the consumer sentiment surveys and consistent reference to confidence. I think that in the cominq quarters we will see a dramtic dive in confidence, the psychology of the markets will likely turn decidedly negative.
The decoupling that has been present between the capital markets and the real economy will evaporate in what could be a grand fashion.
I expect, a decisive move in the near-term and a return to the reality of what currently faces the economy. The continued deterioration in the quality of reported earnings was evident over the last quarter, if one bothered to look. A sharp deceleration is at hand, the inventory builds will prove to be ridiculously optimistic in the face of what is clearly a deteriorating consumer market.
Very difficult period ahead and the coin-flip needs to be revised.
FT.com / Financials - Bolton warns of dangers ahead
Thanks to everyone that posts links -- reason alone to visit the comments sections.
One thing to consider is the amount of CRE investment that goes into big box stores. It seems to me that companies like Lowes and Best Buy build out stores based on the past five years of sales growth, which one can argue was MEW-driven and way above trend. Its likely that big boxes will be suffering from overcapacity for years to come.
Also, someone asked about CRE exposed banks. CRE-heavy regional and community banks in CA and the SW might have the most correlation with residential. This is because commercial lending in those regions is most likely to have "followed" new housing developments. Picture stripmalls and mortgage broker offices next to empty or unfinished housing developments...
Fed about bubbles:
NY Fed's Geithner says global economy not in 'new era of permanent stability'
:
UPDATE 1-Fed's Geithner: Limited ability to tackle bubbles
| Reuters
NY Fed's Geithner says global economy not in 'new era of permanent stability' - Forbes.com
Bolton:
FT.com / Financials - Bolton warns of dangers ahead
Unlike residential, commercial real estate is not valued on a price per square foot basis - it is valued based on the income the property produces and the required rate of return (capitalization rate). Because of this, the only metric to deturmine if CRE is in a bubble is the the capitalization (cap) rate properties are trading at. It may also be possible to look at spread changes on CRE bonds as these indicate a price prediction going forward (though they may also only be reflecting volatility ex: if one property in the bond goes up 30% in value and another property goes down only 10% in value, the bond value will likely drop).
We can not look at the explosive 2004-2006 returns by REITS and conclude CRE is in a bubble. The increases in property value were, in many cases, justified. Many REITS during 2002/2003 bought distressed office properties after the .com boom which are now doing well (many markets out west have seen office rent rates increase 20% or 30% on a per square foot basis and have seen vacancy rates go for 20+% to around 10%).
There are only 2 data sources that I know of which have historical cap rates. One is the Real estate Research Corporation (RERC) and the other is Real Capital Analytics (who sell their data under several other names such as National Real Estate Index).
New York City Office has been the furthest ahead of the curve in cap rate declines (price increases). NYC has seen cap rates decline from roughly 8% to 5% over the last 3 years (with some properties trading as low as 4.5% or 4.25%).
Buying a high risk piece of real estate for a return below that of US Treasuries means one thing: Speculation. This is a market that is frothy, the rest of the country I'm not as sure on.
Hey everybody,
I will be on CNBC today talking about the starts and permits data as well as the broader housing issues at 12 noon and 4 pm NY time today (wed 5/16)(11 AM and 3 PM Chicago time). Tune in if you get the chance.
Dirk
Thanks CR for the explanation
Steve Fontain: That was interesting information about the commercial property cap rate especially the steep decline in New York City from 8% to as low as 4.5% or 4.25%.
By the way if you valued residential properties using cap rate in Palo Alto, CA you will find duplexes with as low a cap rate as 0.48%.
Buy for $1,100,000 or rent for about $2000 per month.
See the links below.
LoopNet - 345 Middlefield Road, Duplex/Triplex/Fourplex, 345 Middlefield Road, Palo Alto, CA
OR
LoopNet - 345 Middlefield Road, Duplex/Triplex/Fourplex, 345 Middlefield Road, Palo Alto, CA
CR - Interesting graph on the historical correlation between residential and non-residential. I'm struggling with what would fundamentally bring down non-res investment spending.
Mechanically, RI is about 4.5% of GDP and non-RI is about 12%, so it's much more important to the overall economy. The 12% weighting of non-residential investment spending consists of structures and equip. and software. The structures component is about 21% of the non-RI and the equip. and software is about 79%. (NOTE: I'm just pulling these numbers from Table 1.1.6 and 1.1.2 from the BEA) That would argue that businesses investing in equip. and software is the real driver. Given that profit margins have been rock solid, stock prices are up, and labor costs are relatively contained, why wouldn't businesses continue to invest and actually increase (particularly with exceptionally low inventories right now)?
Seems to me the seeds are sown for an increase in non-res. inv. spending going forward. So, while res. inv. may be a drag, non-res. looks poised to do well.
Am I thinking of this incorrectly? Thanks.
A large number of REITs are issuing convertibles this year.
Pretty odd behaviour (considering the underlying tends to pay a big dividend and isn't volatile), unless they think their stocks are overvalued.
Comanies are investing, just not in the US.
Intel adds two foundries in China, but looks to cut 1,000 US jobs
GM closes entire plants in Canada, shifts production to Mexico & China.
Mike, Businesses won't invest unless the demand (consumer spending) is there. That's why their profits are being spent on share buy-backs...
Cap rates are just as bad in CA.
Nothing found for 2007 Apr Property Php
Accounting and taxation nuances a side, most of the properties are returning less than interest the loan is accumulating. Not a very desirable position to be in...
CR,
I had a question on the second graph. In the last few years residential investment hasn't been nearly as strong as it has in the past. This seems to some what contradict that we over invested in the last few years (at least relative to previous expansions). When this is compared to charts that show rapid increase in the price of houses as well as an over building. Were previous booms bigger or does this graph understate the current market inequalities?
.................
CR, CAN YOU PLEASE time-shift the first graph as well? It will look much better. Thanks!
Mike,
The thing about looking at borrowing to finance non-residential construction is that it gets around fundamentals and looks right at the process of financing construction. As we have seen with business investment in equipment and software, the fundamentals can do a poor job of forecasting. By looking at demand for loans, we have a second forecasting model that serves as a check on the first. The fundamentals for non-residential construction may be quite sound, but borrowing behavior suggests a lack of interest. Coming up with a story that makes sense of both results would be nice, but the absence of such a story doesn't make the downturn in demand for loans any less scary.
By the way, since the housing problem started, three sectors have been suggested as potential offsets, primed to take up the slack and keep growth on an even keel. Business investment has not turned negative, but it has not been all that great - equipment and software spending has fallen in 2 of the past 4 quarters. Non-residential construction spending has made very small contributions to GDP growth (less than 0.1%) in each of the past 2 quarters, more or less in line with the slowing in demand represented in the lending officer data a year earlier. (Scary how that works.) Consumer spending is the only one of the "saviors" to carry much of a load, and surveys of economists show a central expectation that consumer spending every quarter this year will be lower than the average of the 6 prior quarters. Economists can be wrong, of course, but it isn't a pretty picture.
Yal: Monetary policy has only limited capacity to deal preemptively with financial bubbles, New York Federal Reserve Bank President Timothy Geithner said on Tuesday.
...
In his speech, Geithner outlined potential risks of a financial shock stemming from a higher concentration of exposure by big banks, higher leverage and slackness in risk management due to a long period of low volatility.
Nope, it wasn't our free-money policies. Nope. Not us. No way. Nope.
AZ_Cowboy:
Not to be rude, but your statement is pretty much in agreement with what I said. Commercial real estate spending does not come from residential real estate directly, but is driven by many of the same economic factors. It just takes longer to get the commercial stuff up and running. However, it there are unique aspects to the current residential market that are internal to the market itself (like a speculative bubble) it is possible that commercial real estate will not follow in the normal pattern.
CR: The items that are seen as directly relating to residential construction are highly visible, but a relatively small percentage. To take a snap shot number, last July Residential, Office, Commercial and Amusement-Recreation only made up 14% of the total construction at $20.97MM. Education at $39.12MM or Highway and Street at $39.37 are both greater by themselves.
The Education-Highway numbers will often run almost counter-cyclical to the economy at times because they are often driven by tax revenues and that have to add in the additional long lead time for big public construction projects. A good example would have been Greenville County, South Carolina Public Schools. In the last recession they were laying off teachers while they were building more schools. It was simply a factor of the long lead time on their bond money and planning versus the immediate cash flow issues of paying teachers.